Tuesday, November 18, 2008

It would take some sound economic study, and a specific knowledge of the automobile industry, to determine the value of saving General Motors versus allowing the company to go bankrupt. However, there are a few arguments that are not strictly speaking economic arguments that seem to be missing from the debate. They are arguments about the effects that decisions such as a decision to bail out General Motors will have on the types of decisions people make.

Bailouts and Expectations

A few years ago, I purchased some bonds that General Motors was selling. I purchased them while thinking that there is no way the government would ever allow GM to fail – to declare bankruptcy. If General Motors was near failure, the government would rush in and save the day, giving the company extra cash that it could then use to make sure that I continued to be paid the interest on those bonds.

Now, we get to see if my prediction back then was a good prediction.

However, the way I made that decision suggests that there is at least one good reason to allow General Motors to fail. That would teach people like me, people who invested in anticipation of a government rescue, a lesson. It would teach people to look at the quality of a company rather than its political connections, investing in the best companies rather than the best connected.

Expecting government bailouts generates bad business practices. If a person is thinking, "No matter how badly I screw up, the government will step in and rescue me," then he has no incentive not to screw up. He has no incentive to collect the data he needs in order to make wise decisions. He has no incentive to double-check his logic to see if what he thinks will happen is actually supported by the evidence. He has every incentive to be reckless – and recklessness is costly.

While we are being fed scare stories about how the loss of General Motors will cause the entire economy to collapse (the way we were told that a failure to invade Iraq will result in a mushroom cloud over New York, or a failure to give $700 billion to treasury secretary Paulson would result in total economic collapse. Now, we are being told that the economy will collapse if we do not bail out General Motors.

General Motors' History of Manipulation

Of course, it is worthwhile for General Motors to try to get us to believe this, regardless if whether or not it is true. Plus, this would not be the first time that the company has launched a campaign to lie to and manipulate us for its own benefit. In fact, this campaign of fiction is relatively trivial – doing far less harm – than the last campaign that General Motors took an interest in.

As a manufacturer of gas-guzzling vehicles, General Motors recognized that any steps the country (or the world) took to combat global warming would require a costly change in how they did business. Therefore, they decided to invest in a disinformation campaign. They decided to confuse and muddle public thinking on this issue in order to cause the American people to act in ways that they found currently beneficial, at a potential serious cost to future generations.

For all practical purposes, General Motors (or, more specifically, its leadership) is willing to see the potential destruction of whole cities if it would bring about some marginal increase in profits. For all practical purposes, General Motors (or, more specifically, its leadership) think that it is perfectly permissible to manipulate us into taking action (or not taking action) to avoid states of affairs harmful to the well-being of our children for the sake of a few dollars in their pockets.

As it turns out, GM did not succeed in making enough money with these tactics to stay in business. However, the fact remains that the company performed a significant public disservice. They have, in fact, made our children's and grand children’s lives worse off than they would have been in order to secure fatter bank accounts for themselves in the present. Now, they want a favor from us. Now, it is telling us to trust the people who say that great economic harm would follow their downfall.

Given its history, I am not willing to trust anything that comes out on behalf of this company. As I see it, GM is probably just launching another disinformation campaign to manipulate us into making ourselves worse off for its benefit. These are the types of people who would do such things. Look at the harms they were willing to inflict on our children and grand children.

If the company had shown an interest in the public well-being, then I would have had reason to argue, "We need to have companies like this around. We need to show the world that honesty and concern for others is a virtue, and we recognize the value in rewarding such virtue."

However, as it stands, the most sensible claim to make at this point is, "We do not need to be doing favors for companies what are willing to manipulate us into doing things harmful to ourselves for their benefit. We need to show the world that dishonesty and disregard for the well-being of others, particularly our children, has a price that is best avoided. The price is that we will show the same concern with your well-being and your future as you showed for ours."

Let that lesson settle into the consciousness of the international business community, and we might begin to see businesses investing a bit less money in lies and distortions to manipulate us into doing things harmful to ourselves but profitable for them. We certainly have reason to prefer that world than the current world where lying and manipulating the public to secure a profit is “business as usual”

The Employees

In saying this, it would be wrong to argue that the workers should be left out in the cold to fend for themselves. I am not an advocate of the cold and heartless institution of the capitalist purist that says that governments should never interfere with markets.

I support capitalist solutions when they promise to better fulfill human desires, and easily switch to some other system where pure capitalism seems to fail. I have argued in the past about the effects of great differences of wealth – that people with a lot of money have the luxury of wasting it on things of little value, where others with less money would use it on things of great value. So, I have little problem with the idea of transferring wealth from those who have to those who have not.

If there is a bailout to be had, then that bailout should not be directed towards the executives with their multi-million dollar bank accounts, but towards the workers with their mortgages and their kids that they want to see get to college. These people will need to be transitioned into other jobs – jobs that produce things that actually have some measure of social utility. We need to change these workers from having careers where they are a net drain on the overall economy, and transfer them into jobs that produce a net economic benefit.

This is best accomplished by allowing General Motors to fail, while investing money in those industries that are best positioned to pick up this labor force.

4 comments:

As Al Capp in his satirical comic strip of decades ago said, "What is good for General Bullmoose is good for America!" It is also difficult to feel compassion for GM's rank and file with their $80/hour salaries. I would venture to say that very few in this country make that kind of money. In effect, GM has profited from a nation's fear and ignorance, and the union memberships involved have shared in the "ill-gotten" gains. And, if US America suffers economically, that is the price it has to pay . . . the price that it would expect the rest of the world to pay for wagering its future on fallacies and misguided leaders. Lets not forget that US America has been quick to point out the "weaknesses" and "ignorance" for those who followed other faulty ideologies.

I have compassion for the tears but the tears are coming from the same people who were an active force that backed US America's claim of superiority over the rest of the world. Now the world is telling it that the "bill" has to be paid!!!

The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

i would be much more interested in bail out plans that let the company in question fail (since they have proven their incompetence in their industry) but give the bail out money that would have been given to the failing company to their companies competitors under the agreement that as they expand to cover the percent of the market vacated by the defunct company that they hire the workers from the defunct company that are now jobless. the competitor that hires the most of the now jobless people can get the most of the bailout money. if they turn around and fire those people then they have to give us the bailout money back.

an investment in the competitors could allow the competitors to buy up the failing company and continue running its buisness successfully and employing the people that were employed by the old company

downsides of this would be in areas that have few competitors and would lead to monopolies. the car industry does not seem to be one of these fields

About Me

When I was in high school, I decided that I wanted to leave the world better off than it would have been if I had not existed. This started a quest, through 12 years of college and on to today, to try to discover what a "better" world consists of. I have written a book describing that journey that you can find on my website. In this blog, I will keep track of the issues I have confronted since then.